Why would a debtor with no assets in the United States seek cooperation from a U.S. bankruptcy court in cross-border insolvency proceedings?
Most likely in light of potential or ongoing U.S. litigation; either to seek a stay of the expense and distraction suffered in defending against ongoing litigation in U.S. courts, or conversely, to pursue causes of action against U.S. parties to recover value for a non-U.S. estate.
Whatever the reason, the latest showdown between New York and Delaware has cemented Delaware’s place as the more predictably supportive choice for non-U.S. insolvency representatives seeking cross-border cooperation.
The battle between these venues in cross-border insolvency administration goes back many years. Almost five years ago, this column posited that the Bear Stearns and Basis Yield cases revealed in New York a “developing formalism and rigidity undermining [cross border insolvency] cooperation.”1
As this column observed several years later, this trend continued in Fairfield Sentry, where the New York court’s rigid, grammatical exegesis of the law reached an outcome at odds with logic and legislative purpose.2
Meanwhile, these columns pointed out that the Delaware bankruptcy court continued a historical trend of generous and open cross-border cooperation. Now that trend has solidified, with the New York court once again allowing textualism to overcome purpose, and the Delaware court once again taking the constructive opposite approach.
In the two most recent cases, the precise topic du jour was eligibility for recognition in a cross-border insolvency case. Specifically, would a U.S. bankruptcy court recognize and cooperate with the foreign representative of a non-U.S. debtor who had no operations and no assets in the United States?
The New York response was consistent with the “developing formalism and rigidity” pointed out above. In Drawbridge Special Opportunities Fund LP v. Barnet3, the foreign representative of an Australian company in liquidation was required to identify assets in the U.S. in order to win recognition of its cross-border insolvency case.
To be fair, the bankruptcy court had initially granted the petition without requiring identification of U.S. assets, but on a direct appeal, the Second Circuit court of appeals set a decidedly anti-cooperation precedent.4 Based on the “ordinary meaning” of the “plain language” of the Bankruptcy Code, the appeals court held that a “debtor” under any chapter of the Bankruptcy Code must have operations or at least assets in the United States.
This is the standard for eligibility under section 109 of the Bankruptcy Code for initiation of domestic cases; but are not cross-border recognition cases sui generis?
No, the appeals court emphasized, not under the “straightforward nature of our statutory interpretation.”5 Thus, in New York, a wooden adherence to the language of distant provisions having very different purposes now compelled the court to refuse cooperation.
Less than one week later, the Delaware bankruptcy court in In re Bemarmara Consulting6 explicitly rejected the New York approach in granting a Czech insolvency representative’s petition for recognition of the company’s insolvency proceedings.
A plaintiff in U.S. litigation against the Czech company had objected on the basis advanced in New York; that is, the Czech company had no operations or assets in the United States and, therefore, could not qualify as a “debtor” under section 109 of the Bankruptcy Code. Guided by both textual analysis and a clear sense of Congressional policy, the Delaware court overruled the objection and granted cooperation.
Unlike in a domestic insolvency case, Chapter 15 allows foreign representatives to seek U.S. cooperation with already ongoing foreign proceedings, not to establish eligibility as a “debtor” to initiate general U.S. proceedings.
The very word “debtor” even has a separate definition for Chapter 15 cases, the court noted, since cross-border cooperation requires a “debtor” already to have qualified for eligibility in non-U.S. insolvency proceedings.
The purposes of the two “debtor” definitions are distinct, and cooperation from U.S. courts does not require operations or assets in the U.S., the Delaware court held; rather, it requires simply the initiation of non-U.S. insolvency proceedings and a request for U.S. cooperation from the representative in those proceedings.
The Delaware ruling recognizes the messy reality of incremental statutory drafting, as well as the exigencies of international cooperation in ongoing insolvency matters. It solidifies the Delaware court’s reputation for pragmatism and sensitive statutory analysis, which now stands in even starker contrast with the New York predilection for formalism and “plain meaning” in a context in which very few meanings are “plain.”
Ironically, formalism saved the day in the New York case, as well. The bankruptcy court on remand found that the claims and causes of action the foreign representative sought to pursue as plaintiff against U.S. entities represented the very “assets in the United States” upon which petition eligibility could hinge.7
In another layer of complexity only a lawyer could love, however, the question of where to situate a cause of action – in the plaintiff’s home country, as another New York bankruptcy court had recently decided, or elsewhere – remained disputed.
This question was determined in favor of the non-U.S. debtor, locating the causes of action in the United States, though only in light of “the requirements of justice and convenience.” This serendipitous conclusion would not have worked, however, in the converse case, as in Bemarmara, where the non-U.S. debtor was the defendant in U.S. litigation.
While it may be the rare case in which non-U.S. debtors with no assets in the United States seek cooperation from U.S. bankruptcy courts, the choice of venue in such cases now clearly favors Delaware.
This is especially true when the non-U.S. debtor is a defendant in U.S. litigation, seeking the very breathing room and respite from harassing litigation that insolvency proceedings are supposed to provide.
The very foundation of insolvency policy rests on abandoning artificial formalities and acknowledging the reality of creditors’ claims and debtors’ resources. While New York continues to cling to form over substance, Delaware has once again proven that it gets it.
- Cayman hedge fund liquidators welcome in Delaware, if not New York, Cayman Financial Review, issue 20, 3rd Quarter 2010, pp. 74-75; see also Cayman hedge fund liquidators not welcome in U.S.?, Cayman Financial Review, issue 17, 4th Quarter 2009, pp. 56-57.
- Timing is everything: Cross-border recognition and Bear Stearns reprised, Cayman Financial Review, issue 32, 3rd Quarter 2013, p. 59.
- In re Octaviar Administration Pty Ltd., Case no. 14-10438 (SCC) (Bankr. S.D.N.Y.).
- Case no. 13-612-bk (2d Cir., December 11, 2013).
- Id. at 20.
- Case no. 13-13037 (KG) (Bankr. D. Del., December 17, 2013) (unpublished bench ruling).
- Case no. 14-10438 (SCC) (Bankr. S.D.N.Y. June 19, 2014).